Good Faith in Negotiations

Article excerpt

Good faith is an exceedingly controversial concept both judicially and academically. Yet ironically, it is this doctrine that forms the underlying rationale for numerous other entrenched legal principles. These include misrepresentation, waiver, estoppel and forfeiture. This article will examine the scope of a party's duty to negotiate or bargain in good faith. It is a duty consisting of two obligations. The first is to act "in good faith" and the second is the obligation to bargain.' The former is negative in content as it prohibits certain forms of bargaining behavior. The latter is positive in nature because it requires the parties to negotiate with a view to the actual conclusion of an agreement.

The Concept of Good Faith

The cagey attitude that the Canadian academic and judicial communities frequently display towards "good faith" seems to suggest that it is some novel concept to which they both must reconcile themselves. Nothing could be further from the truth. One of themodern roots of the good faith doctrine comes from Lord Atkinson's dicta in New Zealand Shipping Co. v. Societe des Ateliers and Chantiers de France in which he held that, "...a person shall not be permitted to take advantage of his own wrong." However, the concept of "good faith" is actually far more entrenched in history than this. The doctrine has been traced back to the Romans who summarized the concept with the expression "pacta sunt servanda" or, "what is so suitable to the good of mankind as to observe those things that parties have agreed upon."

The fall of the Roman Empire and the rise of Christianity further refined the notion of good faith as a legal obligation. This was primarily done through the ecclesiastical courts who asserted jurisdiction over contractual disputes by arguing that good faith was a test of the sanctity of contractual obligations. Religion is only one aspect in the history of good faith. The rise of the merchant class during the 1I th and 12th centuries was even more influential to the evolution of the doctrine. Commercial necessity required that good faith as a contractual relationship be honored and enforced.

Unlike its ambiguous status in Canada, good faith is a cornerstone concept in the legal systems of many European countries. This is particularly true for nations such as France, Germany, Italy, and Switzerland.2 Even the United States seems to have embraced the concept of good faith with greater ease than Canada. For instance, an explicit good faith and fair dealings requirement has been a part of American sales law for years.3 Specifically, Article 2 of the Uniform Commercial Code establishes a general obligation of good faith. An expanded version of this requirement can be found in section 205 of the Restatement of Contracts.4 Section 205 of the Restatement declares that: "Every contract imposes upon each party a duty of good faith and fair dealings in its performance and enforcement."5

Definition of Good Faith

Defining what the concept of good faith actually encompasses is an exercise that frequently proves to be frustratingly circular. Commentators have even gone so far as to suggest that the infamous U.S. Supreme Court obscenity test of, "...I will know it when I see it" be used.6 In her article, "Good Faith in Contractual Performance," O'Bryne argues that attempts to define good faith continually prove to be futile because, "...good faith can have no absolute meaning: it simply assumes its contents from the facts of each particular case."7 Interestingly, this approach is similar to the one used by ancient Romans who simply recognized that good faith was based on "... an appeal to common sense."

Essentially, the doctrine of good faith arises from a common concern for fair dealings and the protection of the parties' reasonable expectations. As a result, definition attempts have centered on concepts and terms such as: "fair conduct," "reasonable standard," "decent behavior," or "community standards of fairness and reasonableness. …